2014 Investment Climate Statement - Indonesia

2014 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2014
Report
   

Executive Summary

While Indonesia’s population of 245 million, growing middle class, and stable economy remain attractive to U.S. investors, investing in Indonesia remains challenging. This report focuses on the challenges foreign investors face in Indonesia rather than the range of investment opportunities.

Factors such as a decentralized decision-making process, legal uncertainty, economic nationalism, and powerful domestic vested interests create a complex and difficult investment climate. The Indonesian government’s requirements, both formal and informal, to partner with Indonesian companies and purchase goods and services locally, restrictions on some imports and exports, and pressure to make substantial, long-term investment commitments, also factor into foreign investors’ plans. While the Indonesian the Corruption Eradication Commission continues to investigate and prosecute high-profile corruption cases, some investors cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to investment include poor government coordination, the slow rate of land acquisition for infrastructure development projects, poor enforcement of contracts, an uncertain regulatory environment, and lack of transparency in the development of laws and regulations. New regulations are at times difficult to decipher and often lack sufficient notice and socialization for those impacted. The lack of coordination among ministries creates redundant and slow processes, such as securing business licenses and import permits, and at times, conflicting regulations.

Indonesia restricts foreign investment in some sectors with a negative investment list. The latest version, issued in 2014, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of sectors. Some of the restricted sectors include: telecommunications, pharmaceuticals, film and creative industries, and construction. Of note, the energy and mining sector face significant investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaty agreements (BITs) in February 2014, allowing the agreements to expire as soon as they allow. While the United States does not have a BIT with Indonesia, the Indonesian government’s action reminds foreign investors of the unpredictability of Indonesia’s investment climate.

Despite these challenges, Indonesia continues to attract foreign investment. Private consumption is the backbone of the economy and the middle class is growing, making Indonesia a promising place for consumer product companies. Indonesia has ambitious plans to improve its infrastructure and the “connectivity” of its provinces, which includes building roads, railways and airports, as well as improving telecommunications networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers, such as consumer electronics and automobile companies. For many companies, Indonesia’s investment grade rating, growing middle class, and young population make the country an attractive destination for long term investment.

Foreign investors are watching closely the July 2014 presidential elections, anticipating the changes brought by a new Administration that will take office in late 2014. Analysts expect a peaceful and fair election and continuity of economic policies; economic nationalism remains popular across parties.

1. Openness To, and Restrictions Upon, Foreign Investment

Indonesia’s growing middle class, strong domestic demand, stable political situation, and conservative macroeconomic policy paired with gross domestic product (GDP) growth of 5.8% in 2013 make Indonesia an attractive destination for Foreign Direct Investment (FDI). Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on participation in a large number of public private partnerships to develop Indonesia’s infrastructure. However, vague and conflicting regulations, poor existing infrastructure, rigid labor laws, and corruption continued to be significant concerns for foreign investors. U.S. firms lamented the lack of ministerial coordination but were encouraged with apparent increased accessibility to the Indonesian parliament (DPR) since 2012.

Restrictions on FDI are, for the most part, outlined in presidential decree 36/2010, commonly referred to as the Negative List. The Negative List aims to consolidate FDI restrictions from numerous decrees and regulations to create greater certainty for foreign and domestic investors. The 2010 iteration of the Negative List, the most recent version, clarified that companies are grandfathered-in in the case of increased foreign ownership restrictions. However, exceptions remain; in the case of wholly foreign owned security service companies, their licenses were not renewed, despite grandfathering provisions. In 2010, the share of foreign ownership permitted was increased in health services (health technologies), creative industries, construction services, and multilevel marketing, but decreased in cell towers, security services, and inspection services. For investment in certain sectors, such as mining and higher education, the Negative List is useful only as a starting point, as additional licenses and permits are required from individual ministries. Foreign capital investment, through the stock market, is not governed by the Negative List. Foreigners may purchase equity in state-owned firms through initial public offerings. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia's Negative List unless an investor is buying a controlling interest. As of April 2014, the Indonesian government was reportedly finalizing revisions to the Negative List, including changes that would bring it in line with the 2010 Horticulture Law and 2009 Mining Law.

The Investment Coordinating Board (BKPM) is responsible for issuing investment licenses to foreign entities and has taken steps to simplify the application process through better coordination between various government institutions. BKPM has launched an online portal for its National Single Window for Investment which allows foreign investors to apply for and track the status of licenses and other services online. Although BKPM is meant to act as a one-stop service institution, investments in the mining, oil and gas, plantation, and other sectors require further licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies only require one approval at the local level, businesses report that foreign companies often must obtain both administrative and de facto legislative approval in order to establish a business.

The Coordinating Ministry of Home Affairs, Ministry of Administrative Reform and Bureaucracy Reform, and BKPM issued a circulating letter on September 15, 2010, to clarify investment that crosses provincial and regional boundaries. Investment in only one regency is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by central government, or central BKPM.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century, and remains one of the most prospective countries in the world. But a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks in the bottom 10% among the world’s 90+ mining countries in the Fraser Institute’s mining Policy Potential Index. In 2012, the Government of Indonesia (GOI) banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The ban on exportation of raw minerals went into effect in January 2014. The 2009 mining law devolved mining license issuing authority to local governments, who have responded by issuing more than 10,000 licenses, many of which overlap or are unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator, injecting confusion and more uncertainty into the natural resources sector.

Infrastructure

Indonesia’s Master Plan for Acceleration and Economic Development (MP3EI), launched in 2011, is an ambitious 15-year, $1 trillion infrastructure development plan that includes several public-private partnership tenders and requires almost $700 billion in private financing. Though the MP3EI is a positive development, implementation has been lacking and project groundbreakings in the two years after its launch represent less than 10% of the total plan’s projected value.

TABLE 1:

Measure

Year

Index/Ranking

TI Corruption Index

2013

32/114 of 177

Heritage Economic Freedom

2014

58.5/100 of 178

World Bank Doing Business

2014

120 of 188

Global Innovation Index

2013

85

World Bank GNI per capita

2012

3420

TABLE 1B - Scorecards:

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a 2012 per capita gross national income (GNI) or $4,085 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/documents/reports/reference-2013001142401-fy14-guide-to-the-indicators.pdf

Measure

Year

Index/Ranking

MCC Gov’t Effectiveness

2014

0.10 (58%)

MCC Rule of Law

2014

-0.13 (35%)

MCC Control of Corruption

2014

-0.08 (31%)

MCC Fiscal Policy

2014

-1.2 (81%)

MCC Trade Policy

2014

74.8 (46%)

MCC Regulatory Quality

2014

0.05 (54%)

MCC Business Start Up

2014

0.858 (23%)

MCC Land Rights Access

2014

0.69 (32%)

MCC Natural Resource Protection

2014

82.3 (85%)

MCC Access to Credit

2014

35 (42%)

MCC Inflation

2014

4.3 (48%)

The most recent WTO Investment Policy Review (IPR) of Indonesia can be found here:

http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm

The most recent OECD Investment Policy Review (IPR) of Indonesia can be found here:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm

2. Conversion and Transfer Policies

The rupiah (Rp), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the Bank of Indonesia (BI). With respect to the physical movement of currency, any person taking cash into or out of Indonesia in the amount of Rp 100 million ($8,700) or more, or the equivalent in another currency, must report the amount to the Director General of Customs and Excise.

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, the GOI gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on capital, profit, interest, dividend and other income, funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations, additional funds required for investment project, funds for debt payment, royalties, income of foreign individual working on the invested project, earnings from selling or liquidation of invested company, compensation for losses, and compensation for expropriation. U.S. firms report no difficulties in obtaining foreign exchange.

Bank Indonesia began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

Under the Financial Action Task Force (FATF), Indonesia remains a “jurisdiction of primary concern.” The Financial Action Task Force (FATF) continues to list Indonesia on its Public Statement List as a jurisdiction that has not made sufficient progress in addressing its deficiencies or has not committed to an action plan developed in concert with FATF to address those deficiencies. Despite high-level Indonesian political commitment, the FATF has found that Indonesia has not met the deadlines of its action plan and/or addressed issues of its legal framework and procedures in identifying and freezing terrorist assets to meet the requirements of UNSCR 1267.

3. Expropriation and Compensation

The GOI generally recognizes and upholds property rights of foreign and domestic investors, and the 2007 Investment Law opened major sectors of the economy to foreign investment while assuring investors’ protection from nationalization, except where corporate crime is involved. However, Indonesia’s rising economic nationalism has manifested itself through negotiations, policies, regulations, and laws that erode investor value. These include local content requirements, requirements to divest equity shares to Indonesia stakeholders, and requirements to set up manufacturing or processing facilities in Indonesia.

In 2012, the GOI issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup. That regulation relies upon cost of investment incurred, rather than market value, for purposes of divestment valuation. The GOI is requiring that mining contracts of work be renegotiated to alter terms in favor of the GOI, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies have had to reduce the size of their original mining work area without compensation. New investors in Indonesia’s mining sector no longer have the security of a long-term contract of work with the central government, but are instead issued mining licenses by the local regent, whose term of office is five years. The security of the mining license, and what compensation the local regent is prepared to offer (if any) in the case of its cancellation, is uncertain.

In general, Indonesia’s rising resource nationalism supports the idea that domestic interests should not have to pay prevailing market prices for domestic resources. The domestic market obligation on oil and gas producers is a longstanding example of this expectation. Also in the oil and gas sector, the GOI is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.

The Law on Land Acquisition Procedures for Public Interest Development passed in December 2011 sought to streamline GOI acquisition of land for much-needed infrastructure projects. The law seeks to clarify roles, impose time limits on each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. However, it has not led to significantly reduced land acquisition timelines, but neither has it resulted in accusations of GOI expropriation of land.

4. Dispute Settlement

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort). Indonesia also has a Constitutional Court. The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Judicial handling of investment disputes remains mixed. Indonesia is a signatory to the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts, but, in practice, are not always enforced. The 2012 ICSID arbitration case of British firm Churchill Mining vs. Indonesia is ongoing as of March 2014. Indonesia’s legal code recognizes the right of parties to apply any rules of arbitration upon which they mutually agree. Some arbitration but not all is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body. District Courts do not have authority to hear disputes where parties are bound by an arbitration agreement. In reality, some claims are still accepted by District Courts on the basis of tort or fraud, but are often reversed upon appeal. Some companies have resorted to ad hoc arbitrations in Indonesia using the UN Commission on International Trade Laws (UNCITRAL) arbitration rules. Though doing business in Indonesia remains challenging, there is not a clear pattern of investment disputes involving U.S. or other foreign investors.

In early 2014, Indonesia began to terminate its Bilateral Investment Treaty agreements (BITs) by allowing the more than 60 outstanding agreements to expire as soon as the agreements allow. While Indonesia may later attempt to renegotiate its agreements, Indonesia has not yet determined a timeline or consulted with its agreement partners. The United States does not have a BIT with Indonesia. Ongoing international arbitration cases involving Indonesia may have played a role in Indonesia’s decision to abrogate its BITs.

The court system often does not provide effective recourse for resolving property and contractual disputes. Judges are not bound by precedent and many laws are open to various interpretations. A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law enacted in December 2011 included legal mechanisms designed to resolve some past land ownership issues. Indonesia also has a poor track record on contract sanctity. Government Regulation 79 of 2010 opened the door for the GOI to remove recoverable costs from production sharing contracts. The GOI is also requiring mining companies to renegotiate their contracts of work to require higher royalties, more divestment, more local content, and domestic processing of mineral ore. Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers. The bankruptcy law is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

5. Performance Requirements and Incentives

The Indonesian government notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that the GOI shall provide the same treatment to both domestic and foreign investors originating from any country pursuant to the rules of law.

The GOI offers a tax holiday scheme to exempt certain businesses from paying corporate income taxes for up to ten years under Ministry of Finance Decree No. 130/PMK.011/2011. Businesses must have operated as a legal entity in Indonesia for at least 12 months prior to the issue of the tax holiday regulation, among other requirements. Priority is given to investment in resource extraction, resource refinement, industrial machinery, renewable resources, telecommunications equipment, or pioneer sectors. Government Regulation No. 62 of 2008 provides a tax incentive program for projects conducted in national high-priority sectors which encompass 128 different fields. Businesses may only apply for one tax incentive: either the tax holiday or the tax incentive program.

The GOI expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. As a general rule, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have manpower-training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan to BKPM to get a Limited Stay Visa or Semi Permanent Residence Visa (VITAS/VBS). Expatriates are issued a Limited Stay Permit (KITAS) and a blue book, valid for two years and renewable for up to two extensions without leaving the country. The foreign worker must meet education, work experience, and Indonesian language requirements and commit to transfer knowledge to an Indonesian counterpart. Under Ministry of Manpower regulations, any expatriate who holds a work and residence permit must contribute $1,200 per year to a fund for local manpower training at regional manpower offices. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In 2013, the government issued new regulations on the employment of foreigners, including an age cap of 55 years on foreign executives for oil and gas firms. In December 2013, the Ministry of Manpower and Transmigration issued Regulation 12 on Procedures for Employing Foreign Manpower. The new regulation made some changes to the previous 2008 regulation, including the introduction of a new mechanism to hire temporary foreign workers and simplification of the permit process for foreigners married to Indonesians.

With the passage of the defense law in October 2012, the GOI plans to impose offset or local content requirements for procurements from foreign defense suppliers. Currently, U.S. defense equipment suppliers are still competing for contracts with local partners on the basis of an exception in the law that indicates that purchases may be made from non-state owned enterprise (SOE) sources if not readily available on the local market. Further clarification through additional regulation will reveal how rigid the application of the new requirements will be.

The GOI grants special preferences to encourage domestic sourcing and to maximize the use of local content in government procurement. It also instructs government departments, institutes, and corporations to utilize domestic goods and services to the maximum extent feasible. In January 2014, Ministry of Industry issued two new regulations (Industry Reg. 2 and 3) requiring domestic content in government procurement although the list of products has not yet been finalized. Similarly, the Negative List seeks to maximize local content in procurement, use foreign components only when necessary, and delegate foreign contractors as sub-contractors to local companies. Foreign firms bidding on highvalue, government-sponsored projects report that they have been asked to purchase and export the equivalent value of selected Indonesian products if they are awarded the contract. Some businesses established as Indonesian entities report discrimination as they possess higher foreign equity.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government before investing.

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in Government-financed or subsidized research and development programs. The State Ministry for Research and Technology handles applications on a case-by-case basis.

The GOI issued Government Regulation 82 in 2012 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. The implementing regulations under GR82 are in development, but it is possible that data localization rules will affect some e-commerce or e-service delivery companies.

6. Right to Private Ownership and Establishment

Indonesia recognizes the right to private ownership and establishment by both foreign and domestic entities. Foreign investors are restricted from establishing or acquiring businesses in certain sectors as laid out in the Negative List. Private entities have the right to dispose of interests in business enterprises under Indonesia’s bankruptcy law, although it may take several years to do so. Likewise, terminating employees is associated with high costs and a lengthy process that requires bipartite negotiation, non-binding mediation, and Labor Court approval unless settled by agreement in writing at any time during the process.

To establish a business, one must: obtain the standard form of the company deed; arrange for a notary electronically; obtain clearance for the Indonesian company’s name at the Ministry of Law and Human Rights; notarize company documents; obtain a certificate of company domicile from the local municipality; pay the State Treasury for the non-tax state revenue fees for legal services; apply to the Ministry of Law and Human Rights for approval of the deed of establishment; apply at the one stop service for the permanent business trading license and company registration certificate; register with the Ministry of Manpower; apply for the workers social security program; and, obtain a taxpayer registration number and a valued added tax (VAT) collector number. The process takes an average of 47 days.

7. Protection of Property Rights

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership. Indonesia’s 1945 Constitution states that all natural resources are owned by the GOI for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in December 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24 of 1997, though the Ministry of Forestry administers all ‘forest land’. Registration is sometimes complicated by local government requirements and claims as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Foreigners are not allowed to own land in Indonesia, but can acquire the rights to use, sell, lease, and mortgage land through an Indonesian entity. The Ministry of Housing has proposed foreign ownership rights for properties in the special economic zones of Batam, Bintan, and Karimun. However, these plans have been delayed due to an ongoing revision of the Agrarian Law. Indonesia ranks #101 on the World Bank’s ease of registering property list.

The Directorate General for Intellectual Property (DG-IP), under the Ministry of Law and Human Rights is the lead government agency on IPR issues. A new draft copyright law is currently under review by the Indonesian Parliament, and draft legislation updating trademark, patent, and industrial design laws are in development. While not fully adequate, Indonesia’s current laws provide a solid foundation for enforcement efforts. However, enforcement has been limited. The Copyright Law requires commercial courts to try cases of alleged copyright violations and render judgments within 90 days, though it often takes much longer. While criminal cases against corporate end-user piracy have been successfully prosecuted, rights-holders report that they generally pursue civil settlements to avoid lengthy and uncertain court procedures. Trademark holders have expressed dissatisfaction with the application process, which can take up to two years to process. The GOI has signed and ratified the WIPO internet treaties, but further clarifications in its Copyright Law must be made to fully implement both treaties.

Embassy Jakarta IP Officer:

AmCham Indonesia: http://www.amcham.or.id/

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

The Embassy provides a list of lawyers in Indonesia at http://jakarta.usembassy.gov/us-service/attorneys.html.

8. Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow. Recent successes include passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in December 2011, both of which could have positive implications for foreign investment. Although Indonesia continues to move forward with regulatory system reforms, these efforts have not yet created a level playing field for foreign investors nor does the current regulatory system establish clear and transparent rules for all actors. Certain laws and policies, including the Negative List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions. A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits that tend to make the labor market rigid and uninviting to potential investors. Bureaucratic reforms have slowed, and decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in costly red tape. Ineffective management and corruption are among the challenges faced by the GOI in launching bureaucratic reform. U.S. businesses cite regulatory and transparency problems as ongoing factors hindering operations. Government ministries and agencies, including the Indonesian Parliament, continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora. Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities. In short, investors remain interested but wary, as Indonesia is not currently making the longer-term regulatory changes to generate substantive domestic or foreign investment.

9. Efficient Capital Markets and Portfolio Investment

Although there is some concern regarding the operations of the many small and medium family-owned banks, the banking system is generally considered sound with banks enjoying some of the widest interest rate margins in the region. The ten largest banks, with Rp 3,089 trillion ($268.8 billion) in total assets or 65.2% of the total, dominate the banking sector. Loans grew 21.4% year-on-year as of December 31, 2013, (vis-à-vis 23.0% in 2012) while gross non-performing loans stood at 1.8%, down from 2.3% a year earlier.

Foreigners may purchase up to 99% of the total shares of a domestic bank through private placement or on the stock exchange. Purchases of 25% or more require BI approval. Foreign banks may establish branches if the foreign bank is ranked in the top 200 global banks by assets. To establish a representative office, the foreign bank must be ranked in the top 300 global banks by assets. A special operating license is required from BI in order to establish a foreign branch.

BI has limited bank ownership to no more than 40% by any single shareholder, applicable to foreign and domestic shareholders, and requiring foreign bank branches to become subsidiaries.

The Indonesia Stock Exchange (IDX) index closed at 4274 on December 28, 2012, down 0.9% for the calendar year. In 2013, IDX had 490 listed companies and reach capitalization as high as ($512.82 billion) in May. There were 30 initial public offerings in 2013. Foreigners conduct nearly half of total IDX stock trades in (43% in 2012). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. The ISSI is composed of 219 stocks that are already listed on IDX’s Jakarta Composite Index.

Government treasury bonds are the most liquid bonds offered by the GOI. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the six-month required holding period. The GOI also issued its first sukuk treasury bills as part of efforts to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt was upgraded to investment grade by Fitch Ratings in December 2011 and by Moody’s in January 2012.

The Financial Services Supervisory Authority (OJK) has assumed BI’s supervisory role over commercial banks as of January 1, 2014 and began overseeing the capital markets and non-banking institutions on January 1, 2013, replacing the Capital Market and Financial Institution Supervisory Board.

Foreigners have good access to the Indonesian securities market and are a major source (33% in government securities) of portfolio investment. Foreign ownership of Indonesian companies may be limited in certain industries as determined by the Negative List.

10. Competition from State-Owned Enterprises

Indonesia has 141 State-Owned Enterprises (SOEs), 26 of which contributed more than 90% of the total SOE profit. Sixteen are listed on the Indonesian stock exchange and 14 are special purpose entities such as the Indonesian Infrastructure Guarantee Fund. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications). In 2013, the profits of SOE rose by 17% to Rp 150 trillion ($13.1 billion) compared to 2012. SOEs employ around 780,000 people and contribute an estimated 40% of the country’s gross domestic product. Currently, SOEs command more than 50% of market share in the cellular telecommunication sector in terms of number of subscribers, hold around 37% of the banking sector’s total assets, 52% of the cement sector’s total sales, and 50% of the total energy supply. Indonesian SOE R&D spending varies by sector.

Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, many sectors report that, in reality, SOEs receive strong preference for GOI projects. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Indonesian SOEs adopt a two-tier Board structure with a Board of Commissioners (similar to an American company’s board of directors) and a Board and Directors (similar to an American company’s executive management team). Depending on the type of SOE, either the President or the Minister of SOEs has the right to make appointments and to dismiss members of either the Board of Commissioners or Board of Directors. With such control, board member appointments are subject to government interference. Hence, it is not uncommon for SOEs to have ministers, high-ranking bureaucrats, military generals, or member of political parties, either retired or still active, sitting as Board members. Some SOEs suffer from poor management, which has led to several cases of graft and corruption against former Commissioners and Directors.

The GOI established the Pusat Investasi Pemerintah (PIP) to act as a special purpose investment entity and eventually as a sovereign wealth fund. To date, it has limited its investments to the domestic market in strategic sectors with the goal of stimulating national economic growth. PIP can invest in a variety of asset classes such as equity, debt, infrastructure, and direct investments. PIP is in addition to other GOI SOEs that invest in domestic markets such as PT Sarana Multi Infrastructure, PT Indonesia Infrastructure Guarantee Facility, and Indonesia Infrastructure Finance.

11. Corporate Social Responsibility

While international organizations like the OECD and UN envision Corporate Social Responsibility (CSR) as a comprehensive management paradigm that includes concepts like human rights, employee relations, environment and science, bribery and corruption, consumer interests, and taxation, understanding of CSR in Indonesia tends to focus on community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required in the environmental impact permits (“Amdal”) of resource extraction companies, who undergo a good deal of domestic and international scrutiny of their operations. Because much resource extraction activity occurs in remote and rural areas where government services are limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, there is limited general awareness of those projects, even among government regulators and officials.

12. Political Violence

As in other democracies, politically motivated demonstrations occur regularly throughout Indonesia. Such demonstrations on occasion become violent, but are not a major ongoing concern for most foreign investors. Public reaction to events in the Middle East, including anti-U.S. demonstrations, continues to be limited to sporadic protests, mostly nonviolent.

Fighting terrorism remains a top priority for the Indonesian government, and President Yudhoyono has demonstrated a continued strong commitment to combating terrorism. Since the 2009 bombings of two international hotels in Jakarta, Indonesian police and security forces have disrupted a number of terrorist cells, including some affiliated with Jemaah Islamiyah (JI), a U.S. government-designated terrorist organization that carried out several bombings at various times since 2000. In response to terrorist threats and attacks, Indonesia has effectively pursued counterterrorism efforts through legislation and law enforcement. In 2013, the Attorney General’s Office handled nearly 60 terrorism related cases. Though the Indonesian government’s sustained counterterrorism campaign has significantly degraded the operational capabilities of violent extremist organizations in Indonesia, these groups continue to demonstrate a willingness and ability to carry out attacks with little or no warning. Although U.S. and Western-affiliated interests remain potential targets of terrorists, the focus of terrorists is increasingly on attacks against local governments and law enforcement entities, especially the police.

Foreign investors in Papua face certain unique challenges relative to those operating in other parts of Indonesia. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the Central Highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries. Between 2009 and 2013, there were 46 incidents in which unknown attackers fired on vehicles containing employees and contractors of a U.S. company as well security personnel on the road that links the town of Timika with Tembagapura. Nine of these incidents occurred in 2013, with no casualties or injuries reported.

13. Corruption

President Yudhoyono campaigned and was re-elected in 2009 on a strong anti-corruption platform. However, corruption remains a serious problem, preventing increased FDI, according to some U.S. companies. Although the government has issued detailed directions on combating corruption in targeted ministries and agencies, there has not been a concerted government-led effort to encourage or require companies to establish internal codes of conduct, or effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2013 is 114 out of 183 countries. Corruption remains pervasive despite laws to combat corruption and a strong, independent Corruption Eradication Commission (KPK). The KPK’s purview in corruption cases is typically limited to law enforcement and other public officials, cases that exceed $105,000 in value and/or that represent significant loss to the state. Corruption cases are also handled by the Indonesian National Police and Attorney General’s Office, neither of which have the same organizational capacity to investigate or prosecute corruption cases. Giving or accepting a bribe is a criminal act, with possible fines ranging from $5,500 to $110,000 and imprisonment up to a maximum of 20 years, depending on the severity of the charge.

Indonesia ratified the UN Convention Against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. Indonesia is a lead co-chair along with Mexico of the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption:

14. Bilateral Investment Agreements

Indonesia has signed investment protection agreements with 60 countries, including: Algeria, Argentina, Australia, Bangladesh, Belgium, Bulgaria, Cambodia, Chile, Croatia, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Iran, Italy, Jamaica, Jordan, Kyrgyzstan, Laos, Malaysia, Mauritius, Mongolia, Morocco, Mozambique, North Korea, Norway, Pakistan, People's Republic of China, Peru, Philippines, Poland, Qatar, Romania, Saudi Arabia, Singapore, Slovak Republic, South Korea, Spain, Sri Lanka, Sudan, Suriname, Syria, Sweden, Switzerland, Thailand, The Netherlands, Tunisia, Turkey, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Vietnam, Yemen, and Zimbabwe.

Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from 0 percent to 5 percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China FTA, in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines. Indonesia is currently negotiating bilateral agreements with Iran, India, Australia, New Zealand, South Korea, and European Free Trade Association, studying potential FTAs with Chile, Turkey, Tunisia, Mexico, South Africa, and Egypt. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and six additional countries (Australia, China, India, Japan, Korea and New Zealand).

Non double income taxation between the United States and Indonesia is granted in accordance with the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income, signed at Jakarta July 11, 1988, and its amending Protocol, signed at Jakarta July 24, 1996.

15. OPIC and Other Investment Insurance Programs

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 investment support agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract.

The Indonesian Rupiah may be purchased using the exchange rate provided by BI pursuant to the current rate on the date of the transaction. The BI exchange rate can be found at www.bi.go.id. In 2013, the Rupiah depreciated 26.3% against the USD.

16. Labor

Labor has become a prominent issue for foreign investors in the last few years due to significant increases in the minimum wage for many provinces, including a 44% increase in Jakarta in 2012, and significant restrictions on the use of contract workers. Increases in the 2014 minimum wage were less dramatic, with a relatively modest 11% gain in the bellwether Jakarta area. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax.

Indonesian labor is relatively low cost by world standards, but the country's education system and rigid labor laws combine to make Indonesia's competitiveness lag behind other Asian economies. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia. Lack of education is especially problematic among unskilled and semi-skilled workers. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts are prone to side with local citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right unionize as an advantage to investing in the country. The GOI established in January 2006 a new Labor Court as part of a broader labor dispute resolution system. U.S. companies expressed disappointment in the GOI’s lack of mediation between labor groups and industry during 2012 minimum wage discussions. Expert local human resources advice is essential for American companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia's highly fractured and largely ineffective labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. In January 2014, Indonesia launched a national insurance plan. In October 2011, the Indonesian government passed a revised Social Security Law to take effect in January 2014 in which all formal sector workers must participate. Subject to a wage ceiling, employers’ must contribute an amount equal to 4% of workers’ salaries to this plan. Further, Indonesia is working toward establishing a national agency to support workers in the event of work accident, death, retirement, or old age.

17. Foreign Trade Zones/Free Ports

The GOI offers incentives to over 1,500 foreign and domestic industrial companies that operate in bonded zones throughout Indonesia. The largest bonded zone is the free trade zone island of Batam, located just south of Singapore. Investors in bonded zones are not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles), and foreign companies are allowed 100% ownership. These companies do not pay import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is "exported" to Indonesia, in which case fees are owed only on that portion. Companies operating in bonded zones may lend machinery and equipment to subcontractors located outside of the bonded zone for a maximum two-year period.

A recent Ministry of Finance Regulation No. 147/2011 stipulates that the delivery of products outside of bonded zones into the domestic market is set at a maximum of 25% (down from 50%) of export realization value of the previous year. If a bonded zone company exceeds the 25% limitation, its domestic quota for the next year will be reduced. The new regulation also restricts subcontract work and requires bonded zones less than 10,000 square meters in size to relocate to industrial estates.

As stipulated by the 2007 Investment Law, the Indonesian Legislature (DPR) passed regulations on special economic zones (SEZ) in 2009. At least 20 areas have submitted applications for SEZ status, but only two were created in 2012: Sei Mangke in North Sumatra and Tanjung Lesung in Banten.

18. Foreign Direct Investment Statistics

Indonesia has two main sources for FDI statistics: BKPM, which issues permanent business licenses to domestic and foreign investors, and BI, which records international capital flows as part of balance of payments statistics. BKPM records FDI figures based on issued business licenses. Since licenses for oil and gas, mining, banking, non-bank financial institutions, insurance and leasing are issued by other government bodies, these sectors are not covered under the BKPM statistics. BKPM is expected to increase the sectoral coverage gradually while BI statistics cover all sectors.

BKPM categorizes all investments made into a foreign capital investment company as FDI, even if it is a joint venture with a local partner. This practice tends to inflate BKPM’s FDI figures, which may additionally include equity contributions from domestic partners and investments financed from domestic sources. BI instead follows the standard FDI categorization of equity investment, retained earnings and other capital inflows.

TABLE 2: Key Macroeconomic data, U.S. FDI in host country/economy

Indonesia, 2012

 

Bank Indonesia

World Bank

Economic Data

Year

Amount

Year

Amount

Host Country Gross Domestic Product (GDP) (Millions U.S. Dollars)

2013

908,300 USD (million)

2012

878,000 USD (million)

Foreign Direct Investment

Bank Indonesia

World Bank

U.S. FDI in partner country (Millions U.S. Dollars, stock positions)

2013

1,060 USD (million)

2012

13,480 USD (million)

Host country’s FDI in the United States (Millions U.S. Dollars, stock positions)

N/A

N/A

N/A

N/A

Total inbound stock of FDI as % host GDP (calculate)

2.0%

2013

N/A

N/A

TABLE 3: Sources and Destination of FDI

Indonesia, 2012

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

211,900

100%

N/A

   

Singapore

37,013

17%

N/A

   

Mauritius

15,890

7%

N/A

   

Netherlands

13,636

6%

N/A

   

Japan

11,574

5%

N/A

   

Malaysia

10,731

5%

N/A

   

"0" reflects amounts rounded to +/- USD 500,000.

Source: http://cdis.imf.org

TABLE 4: Sources of Portfolio Investment

Indonesia, 2012 (Data not available via http://cpis.imf.org/)

Table 5. FDI by industry

in USD million

 

2007

2008

2009

2010

2011

2012

2013

Agriculture & Forestry

286

197

-52

286

284

1,200

1,560

Fishing

19

-25

10

52

61

81

70

Mining & Quarrying

1,904

3,610

1,302

1,896

3,882

1,822

2,317

Manufacturing

2,412

2,322

1,573

4,971

8,157

8,945

8,820

Electricity, Gas and Water

-61

-56

53

204

364

284

299

Construction

195

24

7

-49

411

-76

149

Wholesale & Retail

215

1,159

73

2,463

2,882

1,242

1,116

Hotel & Restaurant

-10

16

0

1

-1

-1

-3

Transport, Storage & Communication

919

134

1,799

2,389

2,378

3,023

1,894

Financial Intermediation

1,361

1,927

149

408

559

1,026

509

Real Estate and Business Activity

-4

-201

-25

27

687

830

834

Others

37

212

-11

654

-353

746

870

TOTAL

6,928

9,318

4,876

13,303

19,242

19,138

18,444

% of GDP

1.6

1.8

0.9

1.9

2.2

2.2

2

Note: Public Administration & Defense, Education, Health, Other Community Services all recorded zero FDI

Source: Bank Indonesia

Table 6. FDI by Country of Origin

in USD million

 

2007

2008

2009

2010

2011

2012

2013

Japan

1,126

1,144

896

3,728

5,194

7961

5557

U.S.

1,093

1,040

159

571

-301

831

1063

Europe

2,622

1,966

674

279

4,489

253

-372

China

117

531

358

354

226

336

590

Korea

250

186

80

342

618

692

982

ASEAN

1,107

3,397

1,381

5,903

8,339

7588

8721

Malaysia

232

1,018

313

340

-30

-508

-657

Singapore

836

2,297

1,016

5,479

8,229

7972

9258

Other

436

597

174

950

786

-5,987

-6,698

Total

6,928

9,318

4,877

13,304

19,242

19,138

-6,698

Source: Bank Indonesia

Table 7. FDI by Country of Origin

in total percentage

 

2007

2008

2009

2010

2011

2012

2013

Japan

16.3

12.3

18.4

28.0

27.0

41.6

30.1

U.S.

15.8

11.2

3.3

4.3

-1.6

4.3

5.7

Europe

37.8

21.1

13.8

2.1

23.3

1.3

-0.2

China

1.7

5.7

7.3

2.7

1.2

1.7

3.2

Korea

3.6

2.0

1.6

2.6

3.2

3.6

5.3

ASEAN

16.0

36.5

28.3

44.4

43.3

39.6

47.3

Malaysia

3.3

10.9

6.4

2.6

-0.2

-0.2

-3.5

Singapore

12.1

24.7

20.8

41.2

42.8

41.6

50.2

Other

6.3

6.4

3.6

7.1

4.1

-31.2

-36.3

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Source: Bank Indonesia


Table 8. FDI by Type of Investment

in USD million

 

2007

2008

2009

2010

2011

2012

2013

Equity Capital

5,252

8,033

4,358

7,895

10,429

8,625

9,130

Reinvested Earnings

2,294

1,070

621

4,105

3,922

7,229

6,399

Other Capital

-619

215

-104

1,303

4,891

3,285

2,916

Total

6,928

9,318

4,877

13,303

19,242

19,138

18,444

Source: Bank Indonesia

Table 9. FDI by Industry and Country of Origin

in USD million

 

2007

2008

2009

2010

2011

2012

2013

Agriculture, Hunting, and Forestry

286

197

-52

286

284

1,200

1,560

Japan

0

-4

1

12

20

25

19

U.S.

5

0

0

0

0

0

50

European Union

185

10

-157

34

15

111

180

China

6

7

21

-24

0

0

0

ASEAN

-8

0

-5

0

237

1,070

1,316

Other

15

7

16

-12

12

-7

-4

Mining & Quarrying

1,904

3,610

1,302

1,896

3,882

1,822

2,317

Japan

341

546

-78

84

-101

29

-283

U.S.

1,262

1,056

177

430

-435

650

764

European Union

405

617

392

404

3,593

67

684

China

170

534

357

354

150

284

544

ASEAN

113

614

144

186

418

445

155

Other

-50

228

295

272

266

318

409

Electricity, Gas, and Water Supply

-61

-56

53

204

364

284

299

Japan

16

0

0

63

253

-5

-18

European Union

-76

4

9

135

60

265

194

ASEAN

-1

-66

31

4

14

1

62

Other

0

8

1

8

8

15

12

Manufacturing

2,412

2,322

1,573

4,971

8,157

8,945

8,820

Japan

341

546

-78

84

4,359

7,104

5,301

U.S.

1,262

1,056

177

430

112

163

10

European Union

1,128

991

185

-1,016

-623

-1,934

-1,695

China

8

-4

1

1

33

42

53

ASEAN

397

989

531

1,722

3,013

1,646

3,012

Other

45

-230

-49

814

500

960

835

Wholesale & Retail

215

1,159

73

2,463

2,882

1,242

1,473

Japan

-23

86

74

133

385

409

248

U.S.

-20

-1

-8

0

0

-10

1

Construction

195

24

7

-49

86

-76

149

Japan

6

0

-1

10

94

13

27

U.S.

-6

0

0

0

88

0

0

European Union

27

0

-1

0

91

40

72

China

0

0

0

2

95

2

5

ASEAN

24

14

-5

-23

97

-29

-32

Other

-6

0

0

0

102

-77

-68

Others

37

212

-11

654

-353

746

870

Japan

-123

-13

13

61

85

156

131

U.S.

-1

8

3

-7

-8

-13

-11

European Union

183

6

-86

10

-15

-75

-28

China

-62

0

0

0

0

0

0

ASEAN

27

-4

26

122

121

216

310

Other

18

159

26

419

-619

312

277

TOTAL

6,928

9,318

4,877

13,304

19,242

19,138

18,444

Source: Bank Indonesia


Table 10. FDI Realization by Region in Indonesia
in USD Million

 

2007

2008

2009

2010

2011

2012

2013

Java

8,498

13,567

9,370

11,499

12,325

13,660

17,326

Jakarta

4,669

9,928

5,511

6,429

4,824

4,108

2,591

West Java

1,328

2,552

1,934

1,692

3,839

4,211

7,125

East Java

1,691

457

422

1,769

1,312

2,299

3,396

Banten

708

478

1,412

1,544

2,172

2,716

3,720

Kalimantan

309

115

284

2,011

1,919

3,209

2,773

East Kalimantan

160

13

80

1,092

602

2,014

1,335

Sumatera

1,386

1,009

776

747

2,077

3,729

3,395

Riau

724

461

252

87

212.3

1,153

1,305

Sulawesi

80

65

142

859

715

1,507

1,498

Nusa Tenggara

57

96

234

503

953

1,127

889

Bali

51

81

227

278

482

482

391

Maluku

0

0

6

249

142

99

321

Papua

2

19

2

347

1,345

1,235

2,414

Total

10,350

14,870

10,815

16,215

19,475

24,565

28,618

% of GDP

2.4

2.9

2.0

2.3

2.3

2.8

3.1

Source: Investment Coordinating Board (BKPM)

19. Contact Person at Post:

  • Melissa Brown
  • Trade and Investment Unit Chief
  • U.S. Embassy Jakarta
  • +62-21-3435-9000
  • BrownMA4@state.gov